Who knew the digital revolution could be such a rush? Best Buy did--and it's selling more pricey gadgets and hookup services than anybody.

The temperature outside is five degrees above zero. But that seems to have escaped the dozen shoppers waiting on a recent morning for Best Buy Co.'s latest concept store, in suburban Minneapolis, to open at 10 a.m. Inside, salesclerks in blue shirts and khakis scramble to finish restocking.

A three-story-high display of flat-screen TVs blares on the rear wall--an inviting tower of babble at the center of pricey multimedia gadgets. This is try-and-buy at its most tempting. Play with videogames. Burn a CD. Watch or, better yet, make movies. One interactive pod in the center of the 45,000-square-foot store offers a leather recliner with power assist ($1,299). Hit the remote and the 42-inch Zenith liquid-plasma flat-panel screen ($2,999) roars to life. Another button surfs the Net or downloads tunes from a PC ($1,349). The video resolution is as good as you'll find in a theater. Check out the four sets of Klipsch speakers ($1,886): A $500 woofer is cleverly concealed inside the chair's seat, earning it the nickname "butt kicker." Total price for the complete "digital life room": $15,419--cables and service plans could add 20% or more. The displays, the wares, the bundled offerings--all part of Best Buy's latest attempt to separate your wallet from you.

The Maple Grove, Minn. store is one of a few dozen Best Buy outlets putting on the glitz. It's offering more of the latest in the growing acreage of really cool stuff that's now widely available--MP3 players, digital cameras, giant TVs, DVD burners, satellite notebooks and radios, wireless gizmos. People can't get enough of these fun devices, and those who've already bought them can't seem to upgrade fast enough. More and more toys are on the way, thanks to the constant innovation that makes them more powerful, faster, cheaper, smaller in many cases and better able to "talk" to each other. So overhyped, so overly long in coming, the digital revolution is finally here (see chart),--and Best Buy has become its mightiest foot soldier.

If successful, such company outlets will spread to its other 576 U.S. stores. Yes, the retailer that is best known for grab-and-go electronics, videogames and software at low prices is reinventing itself again--the fourth distinct incarnation in its 37-year history. This time the focus is on bundling high-end electronics with service and installation--without losing its low-price reputation. If it sounds lunatic, it is. "Nobody has been able to do this before," says Bradbury H. Anderson, the chain's 54-year-old chief executive. "If we can only figure out the puzzle." He's muddling through with the support of founder, friend and Chairman Richard M. Schulze, who hired Anderson as a stereo salesman in 1973 and gave him the top job in July 2002.

Richfield, Minn.-based Best Buy is reinventing itself at the top of its game. Its 750 North American locations, including Canada, give the company a 16% share of the $130 billion-a-year market for electronics and packaged media, the number one spot. It's rolling toward its best results in five years, with earnings per share projected by analysts at $2.37, up 24%, on sales of $23.5 billion for the fiscal year ending Mar. 1, 2004. Same-store sales rose 8.6% in the third quarter. The retailer has $1.8 billion cash and is buying back up to $400 million in stock; last year it started paying a 40-cent annual dividend. Despite a recent drop, shares have better than doubled in the last year.

So why mess with success? Anderson sees trouble ahead. Long term, the store base is maturing. Best Buy still plans to open 60 to 70 new stores a year. But a lot of future growth will come from 20,000-square-foot stores (less than half the standard size) in smaller markets. Keeping annual returns on invested capital at 20% could be as tough as selling a used Betamax.

More worrisome are the short-term problems. The flood of imports and shorter product cycles exert severe price pressure on some of the most profitable products--digital TVs, cameras and home entertainment systems. A 60-inch Samsung DLP television that sold for $5,000 three months ago now sells for $4,700. No one believes that digital TVs can escape the price-plunging fate of PCs and anything else with transistors inside. Anderson counters that the lower the price of an LCD TV or a camcorder, the more of them he can sell.

But then there is Wal-Mart. Its share of the electronics market has galloped from 6.9% in 1996 to a current 11%, reports Credit Suisse First Boston. "If we do nothing, Wal-Mart will surpass us by the simple fact they are adding more stores than we are each year," says Anderson. With operating margins on electronics averaging 5% or so, there is no way Best Buy can win "trying to chase the customer out of Wal-Mart."

If it can't compete on merchandise alone, Anderson believes Best Buy can still get a leg up on Wal-Mart. One way is by bundling those goods with add-on services, from reselling Rhapsody, which charges $10 a month for Internet music plus 79 cents a song to burn CDs, to offering complete wiring packages to new-home owners. Another is to tap into private-label goods--not junk at low price points but gizmos that compete directly with major brands. In September Best Buy opened an office in Shanghai with the intent of sourcing goods directly. (Details remain scarce.) If it can increase its share of such merchandise from essentially zilch today to 15% of the mix by 2008, estimates Colin McGranahan with Sanford Bernstein, it could add a percentage point to its operating margin.

Stock quotes are delayed at least 15 minutes for Nasdaq, at least 20 minutes for NYSE/AMEX.
U.S. indexes are delayed at least 15 minutes with the exception of Nasdaq, Dow Jones Industrial Average and S&P 500 which are 2 minutes delayed.